Let’s Make a Deal


“First, let’s kill all the lawyers.” Shakespeare has one of his characters In King Henry VI, Part 2, pronounce that this would be one of the steps necessary to improve life for the common man. I wouldn’t go quite that far, but I do suggest that the legal profession often plays too prominent a role in the economic development process.  This role too often focuses on defending the interests on the one paying the lawyers’ fees rather than finding ways in which equitable and constructive agreements can be reached to serve as the basis for forward looking activities that will benefit all parties.

This post deals with various types of agreements and the role they play in the economic development process.  I try to avoid use of the term “contracting” because it conjures up visions of endless negotiations and enormous documents stuffed with impenetrable language aimed at satisfying lawyers that the dominant party in a relationship, usually the donor, is protected from all possible harm.   

Examples are drawn from a number of different types of projects from my own experience to illustrate how I have found the process of reaching equitable agreements can, in itself, be a positive development tool. 

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Let’s Make a Deal

I am not a lawyer, but I sometimes play one at work. No, I am not confessing to the crime of impersonating an officer of the court. It is true though that through the years I have been an active arbiter (and drafter and editor) of agreements between and among parties who have, for their own individual reasons, decided that they will benefit from working together in some way. I have often been involved in the drafting of working agreements between parties that can serve as a conceptual basis for their commercial relationship. In some cases, fewer than many might assume, legal enforceability is an important issue. I might even suggest that any contract that must be taken to court to determine a “winner” has already failed since the purpose of the agreement is to avoid conflict in the commercial relationship. In the absence of outright fraud, a clear prior agreement will most often provide clarification of the issues that are sufficiently clear to both parties that neither feels it worthwhile or necessary to invest the time and money required to mount a successful court case.

Formal purchase or sales documents where valuable fixed assets (e.g. land or production equipment) change hands and loan agreements are cases where legal counsel is necessary since particular specific points of local law are involved. In those cases it is certainly necessary to refer any draft agreements to legal counsel to insure compliance with local laws. Even in those cases, I have often found that relying on attorneys to draft such agreements often actually obscures the issues they are meant to clarify.

The use of “legalese” that is beyond the understanding of mortal men has the tendency of convincing those mortal men that the lawyer knows best, a view often encouraged by the lawyer in question, and that they should not question his or her understanding of how the deal should be done and documented. Long and complex documentation including all manner of sub-clauses, riders and caveats that appear to be irrelevant to the parties involved tends to reduce the seriousness of the contracting process in the minds of the individuals involved. The result is often that the contract document becomes somehow separated from the deal itself. Especially in countries where legal literacy is low and the rule of law is somewhat less transparent than one might like (e.g. pretty much all of the countries I have worked in) both parties to a deal will as likely as not consider the contract to be no more than a “paper” required by the government or a bank,  and not a critical description of the deal itself. Until, of course, one party decides that there might be a benefit in bringing the other to court to sue for protection of his or her rights.

A contract is no more than an agreement between two or more parties that spells out the rights, responsibilities and limitations of each. Contracts may have many purposes but we can consider that any formal agreement is, by definition, a contract. Even the nature of the formalization is variable. It may take the form of the parties signing in the presence of a notary with witnesses verifying the signatures. Or, it may be as simple as their spitting on their hands and slapping palms. The important thing is that, however it is formalized, both parties consider the deal serious and binding. Simple verbal agreements are even recognized as binding in the US and elsewhere as long a there is evidence of the agreement – usually in the form of a witness.

The first important task of a successful contract is to clearly lay out the purpose of the agreement. How can the parties be expected to agree on specific terms if the purpose is not clear?  Mammoth problems with land transfer agreements in the United States and Kenya, among other places, have been the result of the lack of a common understanding of what it was they were agreeing about. The presence of such vast cultural differences between the parties (e.g. the U.S. Cavalry and the Native Americans or the British Colonials and the Kikuyu leaders inKenya make it crucial that clear agreement of purpose is accomplished before the terms are hammered out. In both of these cases, the “locals”: appear to have felt that they were generously agreeing to share their land for a while with the newcomers, the concept of individual land ownership being unknown to them.

I find that it is usually best to first lay out the principles of the agreement in clear, simple language that both parties can agree to and then take it to the attorney to be put in a form consistent with local law and legal custom. Then I ask the lawyer to go into his or her draft of the agreement and show me where the principles originally established are presented and to explain any language that might modify, weaken or confuse those principles.

Most agreements are (or should be) aimed less at providing a basis for court litigation than at avoiding the need for such litigation. What is the use of making a legally enforceable contract if one or the other party either cannot afford to go to court or feels that the local justice system is stacked against him?  It is much more important that the agreement between the two parties be comprehensive and that the benefits be clear to both parties. Clarity is more important than enforceability.

Just as it is true that “good fences make good neighbors,” it is also true that “good contracts make good partners.”  The fence between neighbors defines the limits of the interests of the two parties and it is clear for all to see that one party has a controlling interest on one side of the fence while his or her neighbor controls the other. The tricky bit is, in the absence of expensive surveyors with fancy equipment or even land deeds that define the boundaries, deciding just where the fence should be placed. Local custom may suffice in some areas where acknowledged local leaders can decide that a property line extends between stone “A” and tree “B” or follows the course of stream “C” or ridgeline “D”. In other cases the parties themselves may demarcate the line by jointly determining the appropriate placement of permanent boundary markers – often simple piles of stones gathered from the fields being demarcated.

However it is accomplished, the establishment of this boundary in a place that is acceptable to both parties constitutes a sort of contract between them. Even with this contract in place, problems can arise. What about the age old problem of a tree on one property dropping its fruit or leaves on the neighboring property?  Who then owns the fruit or must rake up the leaves?  What happens when the tree falls across the property line, destroying the fence and damaging the neighbor’s house?  Is the owner of the tree responsible for repairing the fence, which may be said to be “owned” by both or restoring the damaged house of his neighbor?  All of these issues could be covered in a legal contract, or even in a simple agreement between the neighbors.

Similarly, in the sphere of third world SME development, unexpected things can go wrong. Neighboring businesses may agree that they can both benefit by purchasing certain products together, sharing the transaction and transport costs and perhaps qualifying for lower prices on the basis of their larger joint purchase. They can say that this is a simple deal between neighbors and friends and that they do not need to define it by a contract. This may be so most of the time, but unforeseen problems or questions can arise that would sorely test the limits of their friendship:  Who will go to town to make the purchase?  How will the transport costs be shared?  What happens if they are not able to purchase enough to satisfy the needs of both?  What happens if the person going to make the purchase and carrying their combined cash with him is robbed of all the money along the way?  What happens if it rains on his return journey and the goods are damaged as a result?  These and very many other unforeseen events and questions could cause an otherwise mutually beneficial arrangement to fail and for one party to end up feeling that he has been cheated by the other. And, when it comes to joint marketing of agricultural products, the opportunity for conflict is even greater.

These and very many other unforeseen events and questions could cause an otherwise mutually beneficial arrangement to fail and for one party to end up feeling that he or she has been cheated by the other. A well-thought-out (and well-spelled-out) agreement defining the details of the deal could avoid many problems and provide a basis for resolving others without resorting to litigation with all of its costs and risks.

This does not mean that these two people, who just want to cooperate in a limited way for their mutual benefit, must spend money on a lawyer to commit all of this to a paper suitable for reference in court. Sometimes it may not even be necessary to write down the agreement at all. It only means that the parties will always benefit by considering together how a deal might go wrong and how they agree to deal with such circumstances. In most cases, I would say “Why not write down those understandings as a protection for both, and possibly for heirs, against the fuzzied memories the passing of time and changing circumstances often bring about?”  While it is clear that illiterate farmers in an isolated African village might have a limited capacity for documenting their agreements in a modern Western way, there are usually alternative ways of confirming agreements – for example, by stating them in front of a respected third party like the village chief or other traditional leader.

The Good Contract:

A contract in the context of enterprise or agriculture development is good to the extent that it provides a basis for the resolution of differences between the participating parties within its own content. That is, the parties themselves can read the terms of the agreement and determine how to resolve a problem. In cases where they cannot agree on the interpretation of a specific point a respected third party may be asked to serve as arbitrator. What are the factors I have found to be critical to the establishment of good contracts recognizing that any contract that has to be enforced by an outside court has already failed?  Here are a few:

  • Clarity:  The language must be clear and understandable to both parties. Why resort to the “Party of the First Part/Party of the Second Part” obfuscation when it is just as easy to same “Kojo and Abdullah”?  The KISS (Keep It Simple, Stupid) principle certainly applies here – and elsewhere.
  • Comprehensiveness:  The primary purpose of most contracts is to define the responsibilities and rights of the participants. The drafting of a contract is a good opportunity to really look at all sides of a proposed deal and ask a lot of “what if” questions. When the answers to those questions raise problems that could bring harm to one or the other of the parties and thus the deal itself, those points should be dealt with explicitly in the contract. I am often told that certain aspects of a deal will be dealt with later, when more factors are known (e.g. final sales prices or harvest figures). In my experience, this is a mistake and leaves the door open for future disagreements. Dr. Murphy’s 1st Law (“Whatever can go wrong, will go wrong.”) applies in these cases, and is easy enough to avoid by spelling out all aspects of the agreed transaction. A comprehensive agreement between an agricultural processor and small farmers, for example, will specify the identity of the parties, the product to be covered by the agreement, the technical specification for grading that product, the schedule for delivery of the product, the technical inputs and financial assistance to be provided by the processor and the terms under which it will be provided, the prices that will be paid for various grades of the product and the timing and form of payments[1]. It will name which party will be responsible for what functions ranging from initial plowing to delivery to the processing plant, assign responsibility for crop failure and the effect on any advances that are to be deducted from crop payments and defining a process for dealing with unexpected problems that might arise (e.g. mediation or arbitration).
  • Fairness:  Another important element of good contracts is fairness. A good contract documents a “win:win” deal with both parties understanding clearly how they will benefit from the deal as well as how the other party will benefit. It is not enough for the contract to be objectively fair in the eyes of an impartial arbiter. It must be perceived as fair by both parties. Both must agree that the exchange is fair and entered into freely without coercion. This can be pretty difficult when the two parties are inherently very unequal in terms of their economic or political power, but if contracts are used to enforce unfair deals, there is always an incentive for the weaker party to find ways to work around the agreement. It is the perceived mutual benefit of the deal that confirms its long-term success. It works because both parties clearly see their own individual interest in making it work. They need each other. One difficulty in developing this type of agreement in many countries is a deep-set general skepticism about the possibility of negotiating a win:win arrangement.
  • Impartial Arbiter:  It is an unfortunate but inevitable fact that sometimes things do go wrong, even in a good deal defined by a clear, comprehensive and fair contract. In these cases, if the courtroom is to be avoided, it can be valuable to have identified a mutually respected third party in advance to help the two parties resolve the problem. This help may take the form of binding arbitration or less formal mediation aimed at helping the two disputants resolve their own problem to their mutual satisfaction using an impartial “decider” (arbiter) or advisor (mediator).

These arrangements can also fail, culminating in a rupture between the parties, if not a confrontation in court, but my experience has been that this is very seldom the case. In appointing the arbiter (or mediator) the critical point is that the two parties agree on who will be chosen and that this person be named in the contract. Exactly who is the best person to name as arbiter depends on the situation. An agreement between two African villagers might best be mediated by the village chief; a role traditional leaders often play in many societies in any case. At the other end of the scale, an agreement between two larger corporations might best be arbitrated by a mutually agreed lawyer who would be paid equally by both for providing the service but still at lower cost than undertaking a court case. Other agreements might be arbitrated by respected professionals in the community, religious leaders or anyone else the two parties might agree on who is in a position to understand the issues and make a reasoned judgment.

I have extracted these simple points from years of experience with many contract situations, mostly in the form of agreements among agriculture producers or between producers and exporters or processors of their products. The example I use most often to define a good outgrower agreement was drawn from experience with a major international tobacco company and their contract with the small-scale farmers they rely on for their tobacco leaf. While I have seen the same sort of agreement implemented in other places as well, the clearest illustration comes from the “far” side of the island of Bali, Indonesia.

Tobacco in Bali[2]

Tobacco is a rather peculiar crop that still, in this modern industrial age, benefits from a working partnership between small-scale farmers and large-scale processors. The raising of the crop itself requires the careful attention of a devoted and knowledgeable grower and large amounts of labor at particular points of the growing season. Thus, it is not easily adapted to large-scale mechanized plantation cultivation without seriously compromising the quality of the crop.

At the same time, the processing of tobacco into cigarettes for the mass market is a large-scale operation involving sophisticated equipment and specialized labor plus, of course, extensive and efficient distribution networks. I have, not so long ago, seen some large-scale traditional cigarette manufacturers in Java that still rely on hand production of the peculiarly Indonesian specialty of “Kretek” (clove) cigarettes. These are actually a mixture of tobacco along with up to 40% (I am told) of ground dried cloves. Even this process is being mechanized, however, and soon (if not already) the huge rooms full of women making cigarettes by hand one by one using their little roller boxes will be a thing of the past.

The contract that is the basis of this case in Bali involves three parties, all of whom are signatories. And, all of whom have rights and responsibilities established in the contract.

First, is the major international tobacco company that creates the market and plays the central role in making the system work. The company guarantees to buy a certain amount of tobacco of certain grades at specified prices at scheduled times during the harvest season. Payment is to be made in cash at the time of delivery net of any payments due to the bank. The company will also provide technical assistance to the farmers at no charge and assist them in receiving production credit through the agricultural development bank.

The second party to the contract is the farmer. An individual contract is signed between the company and each farmer but the details (especially the price) are hammered out in negotiations between the company and a group of elected farmer representatives before the planting season gets under way. The farmers agree to produce according to the advice they are given by the company, to use specified production inputs according to the time tables they are given and to sell their crop to the company for the agreed price with any loan payments due to be paid to the bank being deducted and submitted to the bank on their behalf at the time they are paid.

The agriculture development bank is the third party to the contract. The bank agrees to provide each farmer with a certain amount of credit, which is related to the amount of land that will be planted to tobacco. The credit will be disbursed in the form of production inputs provided by the company according to a pre-established list of supplies and prices and secured by the contract itself. The company does not serve as a formal guarantor of the loans.

The company, by virtue of its ability to purchase inputs in bulk, is able to secure better prices than the farmers could do individually, and to insure that the correct supplies are available at the time they are needed. Its management of the loan disbursement and collection activities, which are related closely to its relationship with the farmers in any case, reduces the transaction cost of the program to the bank and makes it possible for the farmers to be offered interest rates that are somewhat lower than they would be if each loan were to be managed separately. The bank deals with a large group of small, low risk customers but at a cost more akin to servicing one large customer.

Cynics might suggest that this system only works as long as there is only one buyer in the market. The more “normal” experience with such agreements is that they break down as soon as an outside buyer appears who is willing to pay the farmers a slightly higher cash price and who will not deduct those pesky loan repayments encouraging a phenomenon known as “side-selling”. Farmers are not the only potential culprits in these deals. Processors are likely to become much more “strict” in their grading practices in a good year when there is plenty of produce in the market or find other ways to reduce the actual average price they pay for the produce they need. There are, of course, other cases I have seen where the buyers simply declare a new price based on their version of market realities at harvest time leaving the farmers without alternatives and without confidence in the whole contracting process.

There is a simple reason these are not major problems in this case:  all three parties respect the deal. None is doing any favors for the others. They need each other in the long term and their relationship is clearly and comprehensively spelled out in a simple agreement all the parties understand, have confidence in, and want to work. The company has demonstrated, in good years and bad, that it will keep its end of the deal, sometimes paying prices that are actually higher than those prevailing in the open market at the time, sometimes paying less if there is a limited amount of good leaf available, but always paying the price specified in the contract. The company needs a cadre of experienced farmers as reliable partners in order to insure that it has access to the leaf it needs to fulfill its production goals. If it were to start manipulating the pricing and payment requirements of the contract, the farmers would find it easy to sell their tobacco to the numerous “pirates” that roam the area looking for open market tobacco on a single-deal cash basis.

If the farmers were to not honor their requirements under the contract, they would be excluded from participating the following year. The company would not include them in the production program and the bank would not extend credit to them. The rate of farmer turnover in the program annually is extremely low. I don’t honestly recall the figure but 4% sticks in my mind. Many others are standing in line waiting for a chance to get in when, for one reason or another, a participating farmer drops out.[3]

I have studied, designed and implemented variations of this model in several countries. The development of mutually beneficial commercial relationships between pineapple exporters and small-scale pineapple producers in Ghana around the turn of the millennium is one case in point. The development of similar relationships between Armenian tomato processors and producers is another. These agreements did not include all of the elements of the ideal contract used to illustrate these points, but they and others have begun moving the definition of these commercial relationships in a positive direction. Recent experience in Moldova demonstrated, to my satisfaction at least, that neither farmers nor processors in that Post-Soviet country are ready to enter into solid contract-based long-term relationships to their mutual benefit, but they are finding interim ways of working together incorporating some of these concepts informally. I am confident that those relationships will continue to evolve as their importance to the participants is demonstrated ever more clearly.

Armenian Garments:

Just to illustrate my acceptance of the fact that these solutions are not always successful I will now give you at least some of the sorry details of an attempt to use a clear contract to establish a rather complex multi-party business that has not succeeded ——- yet.

Conversations with managers and owners of several Armenian garment production companies[4], led our project team to discover that development of an efficient marketing program for their branded products in Russia would require a representative in Moscow and warehousing facilities so that orders could be filled from stock. Two or three producers had their own wholesale marketing links in the Moscow market, but these were mostly not very professional and none were able to run an efficient warehousing and order fulfillment operation.

We attempted to demonstrate to interested producers the value of working together to establish a professional marketing and fulfillment operation in Russia’s leading wholesale textiles and apparel market. We brought interested parties together, outlined a contract for them that would, in our view, protect the interest of all the parties, put together a comprehensive business plan and offered to partially finance the kick-off of the program with a substantial grant.

The response from the parties was that they were really interested in the idea but that, because “Armenians don’t work well together,” they could not undertake such a joint effort. They basically did not believe that one of the ever-feared “big” guys would not take over and monopolize all of the benefits. Even our contract, which they all agreed was “good,” could not overcome the very deep mistrust that infects the Armenian business community.

Our solution was to go ahead with the one company that did see the value of the concepts and wished to implement it. But we agreed to support this company only if it would start out cooperating with at least one other manufacturer from the get-go and add others as their desire to participate developed. The operation was launched on this basis and things started out just dandy, except that the two companies were actually operating independently sharing showroom and warehouse space but each with its own staff and neither with any promotion budget. Sales did increase dramatically but economies of scale were forfeited to mutual distrust and lack of confidence in the contract mechanism – and other, smaller, companies were cut out of the business.

So, why did we blow that one?  I think it was simply because we, the so-called experts, were pushing the participants to move before they were ready and that our understanding of the goal of the exercise was different from theirs. We thought the goal was to improve the effectiveness of the marketing of Armenian textiles and apparel products in Russia. Apparently their goal was only to increase the near-term sale of their individual products without an understanding that making a bigger “pie” would mean that each participant could have a bigger piece of it. Furthermore, while we were sure that our goal could best be achieved by a western-type joint marketing program, they were equally convinced that their goal could only be reached if each producer controlled his own program completely. There was a theoretical willingness among some parties to include the products of selected other producers along with their own but none were willing to be represented by anyone not under their direct control. Apparently our “conversation” had not gone far enough in this case.

Palestinian Herbs: 

On a more positive note, I recently saw a group of Palestinian culinary herb producers build on a (short) history of informal cooperation to launch more formal joint marketing and fulfillment activities on their own initiative with encouragement and minimal support from a USAID project. They have a long way to go to fully rationalize the industry for maximum operational efficiency in a tough market, but it does look like they are off on the right foot.

Agreeing with Government in Armenia:

The same principles can hold true when dealing with government. At the very beginning of the avian influenza panic in 1999, our USAID project was asked to take on a new activity that would help agencies of the Armenian government deal with the threat. The good news was that the whole idea was so new that no one had a very fixed notion of what to do. We thus had a great deal of latitude in coming up with a meaningful program. The bad news was that the Armenian government had little interest in such a program since the disease had not been detected in the country and there were a great many other serious animal diseases that were an immediate threat. They did not have the resources to deal adequately with those diseases, let alone a new one.

We began an extensive conversation with farmers, villagers, consumers and government officials (veterinary officers and local officials) throughout the country to try to understand their perception of the highly publicized, though still theoretical threat. At the same time we consulted with US veterinarians and public health experts with the required technical specialties to identify potential activities that would be helpful in addressing the problem.

After that, we had a very frank conversation with the Ministry of Agriculture about our conclusions and proposed things that we could do that would enhance their capacity to deal with the still hypothetical avian influenza threat while also strengthening their ability to deal with current problems. Much to the displeasure of our USAID masters, we then negotiated a very comprehensive memorandum of understanding with the ministry detailing the things we would do as well as the things they would do by way of facilitating our work and sharing the cost in specific important ways (e.g. upgrading the physical structure of the Central Veterinary Laboratory before we installed new equipment for it). The MoU had no legal standing at all, since only the US Embassy is officially authorized to undertake such agreements on behalf of the US government. This agreement was between me, as project director, and the Minister of Agriculture, however, and it was very successful in both guiding our work for the next two years and in creating a true sense of partnership between us that led to a lot of progress in important areas.

USAID Contracts and Grant Agreements:

Before launching into a catalog of all things that are wrong with the contracting processes being employed by USAID and other donors, I want to confirm my enthusiastic support for transparent management of the procurement and grant processes and insurance that public funds will be used effectively and for their intended purposes through effective oversight and reporting processes. Nevertheless, it is has been my experience that contracting and procurement procedures now required by USAID and other major donors have become a factor seriously reducing the effective use of international assistance funds. The lawyers have won and the economic development process has lost. Overly long and obtuse contract clauses (not unlike this sentence) written in a language only a lexicographer could love preceding pages and pages of annexes on many subject of little relevance to contractors or grantees ensure that grant agreements and contracts are, for the most part, not even read (never mind understood) by the parties to the agreement who are the intended beneficiaries.

A few years ago in Armenia I tried to develop a simple but effective grants process to support small and medium agro-enterprises in a responsible way using cost-share grants as one of the assistance vehicles. First, we tried to write a grants manual, which is understandably required of all grants programs by USAID. By the time our home office contracts specialist finished with the draft it was clear that a careful application of all its conditions would ensure that no grants would be made – and that was before USAID even reviewed it. Through a series of long and tiresome exchanges, we were eventually able to scale it back to a level of detail that would be both clear and effective while assuming the basic intelligence and good judgment of project managers, subject to ex-post audit evaluation. After several months of needless delay and mental stress, we finally arrived at a workable document that made it possible for the grants process to move forward.

The second step in this process was to develop a clear, succinct and effective grant agreement that would satisfy the procurement restrictions of USAID and be understood and taken seriously by grantees.  By the time multi-page annexes were added, at the insistence of USAID, dealing with the ownership of intellectual property, gender equity, environmental protection, travel restrictions, the support of terrorist, etc., ad nauseum, the document was so long that grantees no longer took it seriously. What could have been a valuable part of the business development experience became just another cynical exercise of grantees agreeing to things that had no relevance to them and that we all knew were unenforceable in any case, in order to get “our” money. As manager of such projects, I am prepared to take on the responsibility for ensuring   that all donor requirements and procedures are honored. Pretending that these annexes have any relevance to the recipient of a $500 grant, to support his or her participation in a trade show or design new packaging material, strikes me as plain foolish.

The final result of all this was quite a successful grants program that stimulated new investments and the adoption of modern marketing and production technologies with an overall cost share ratio (grantee:grant) of more than 7 to 1 and no questions being raised by reviewers about the grant approval or procurement processes. Our project team knew the rules and was closely involved with all the client enterprises, not in the least because of the convoluted grants process.

Just one more brief example to seal the point: Just two days before drafting these words I heard from a close friend of mine that he had just concluded a contract for six days of desk research work in the United States from a USAID contractor with whom he had previously worked full time on long term assignments. More that a month was required for this contract to be finalized, from the time technical approval was received from USAID. This time was used by the contractor to confirm all of his degrees (My friend is nearly 60 years old and imminently well qualified for this assignment.) and dredge up all manner of obscure documentation. The result was finally a 16 page document full of “whereins” and “whatfors” to cover a scope of work less than ½ page long. And I am sure that all of this work was required by USAID. And they complain about the high overhead rates charged by contractors!?

Surely there should be some room for reasonableness in these processes but the extraordinary fear of donor contracts officers (and their bosses) in the second decade of the 21st century does not offer much reason for hope. I fear it is going to get a lot worse before it gets better since the first goal of any bureaucracy is to perpetuate its own existence and the first goal of any bureaucrat is to perpetuate his or her existence within those bureaucracies and the same is true of lawyers. If we are ever able to change the dynamic from one in which we protect ourselves by hiding behind lawyers and their legalese to one in which we minimize the need for their involvement through increased clarity and better communication, the development process will be the winner.

If I have managed to either pique your interest or provoke your ire in this post, please go to the comments box that appears after the footnotes below to share you thinking.  I would really like to hear the experience the rest of you have had in this important area, even lawyers (perhaps, especially lawyers).  And don’t forget to scroll back to the top and sign up to receive future posts in your email box automatically.  I promise there won’t be too many and I will try to make them both pertinent and interesting.

[1] Even when it is not possible to specify certain factors (e.g. Crop prices) in advance, a method of determining the price can be agreed (e.g. “the price quoted in a certain market on a certain day.

[2] Before proceeding, I should perhaps apologize to the more socially sensitive among any readers I have not managed to offend so far for the fact that this case deals with the demon weed.  Nevertheless, business is business and business contracts are the topic of the moment.

[3]  This case is drawn from research I did into various types of outgrower agreements in Indonesia in the early 1990s.  I have no reason to expect that the situation has changed much since then.

[4] The importance of the conversations as a development tool was discussed in an earlier post.

2 thoughts on “Let’s Make a Deal

  1. Gary, there seems to be no way to sunset government contracting requirements, policy directives that spawn literally decades of legal interpretations that frequently go in different directions, and increasing trend on the part of contracting officers and auditors to put together “gotcha” compliance requirements in the regulated market of development assistance. I am glad that you stuck mainly to contracts between businesses, where there are at least some market forces at work.
    Time is needed to develop trust over cycles of up and down market cycles. I couldn’t help but compare the relationships between cotton companies in and farmers in Subsaharan Africa with the Kretek company and tobacco farmers in Bali. They have similar timeframes, but the cotton cycle is boom and bust, with “side-selling” a phenomenon that increases with global prices. True, most of the cotton industry in SSAfrica has been through decades of restructuring away from State ownership and intermediation, but I wonder if it is possible to generate trust in contracts, whether verbal or written, in countries with none of the risk safety nets of middle and high-income countries and globalized commodities?

    • Don, Thanks for this thoughtful comment and the useful comparison. Perhaps part of the problem here is the lack of confidence the players have in any long term business relationships given the weak business environment in general. If we don’t believe in the long term in any case, I suppose we will all do our best to maximize short-term gains.


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